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5 Reasons the Pendulum Is Swinging Back to Equal-Weight Baskets
The Story of 2023: Equal Weight vs. Market Cap Weighted Indexes
2023 was a year of extremes. When investors look back on 2023 in the future, those who study the sole price action of the major indices will fail to understand what it was like to trade the market in real-time. That's because, until recently, much of the years biggest winners are mega-cap tech juggernauts that have drastically larger market caps than most stocks – and even most countries.
"The Magnificent 7," comprised of high-tech companies, with massive cash hoards, and ample institutional investments have been so strong that they have put the broader indices on their shoulders. In other words, investors who look at market cap-weighted indexes are not getting the full picture because these mega cap behemoths have pulled more than their weight and have masked the weakness (or lack of strength) in other areas of the market.
In an equal-weight index or ETF, every stock in the portfolio carries the same weight, offering more balanced exposure across all holdings. This means smaller companies contribute as much as larger ones. Conversely, market cap-weighted ETFs assigns weights based on the market value of each stock, making larger companies more influential.
To illustrate how stark the difference has been between each of these indexes, the Nasdaq 100 Equal Weighted Index is +27.69%, while its market cap-weighted counterpart the Nasdaq 100 ETF is up ~50%! For the S&P 500 Index, the difference is even more stark. The Invesco S&P 500 Equal Weight ETF is +7.65% for the year, while the S&P 500 Index ETF is up more than double that (+21.31%). Though the trend mentioned above has persisted for most of 2023, there are five signs that mega-cap dominance may be nearing its end, including:
Relative Strength Reversal
Observing a change in raw relative strength is often the first sign that a trend change may be around the corner. Tuesday, QQQE rose 2%, more than double that of the QQQ's +0.85% gain.
Rotation: Digestion in Mega-Cap Stocks Leads to Strength in Other Market Areas
As self-proclaimed data-junkie Callie Cox (@calliebost) pointed out in a tweet, "Today (Tuesday) was the first day since July 2022 that the S&P 500 rose even though every Magnificent 7 stock fell." In other words, as mega-cap winners take a breather, money is rotating into small and midcap cap stocks.
Small Caps: Evidence of Reversion to the Mean Potential
Markets are cyclical. When big caps get stretched to far to the upside, eventually small caps take the baton and outperform. The Russell 2000 Index has failed to mint fresh 52-week highs since November 2021. The streak of more than 500 days without a fresh 52-week high is the longest in the indexes 39-year history. If history repeats, the reversion to the mean should be breathtaking.
Net New High-Low Indicator Suggests Participation is Broadening
After struggling to achieve net new highs for months, the Dow Jones Industrial Average has achieved net new highs for 19 straight sessions. In other words, investors are spreading the love to stocks not within the Magnificent 7.
Valuations Have Shrunk
Valuations in beaten-down growth stocks are becoming too attractive for investors to pass up. Software company Twilio, a former pandemic darling, is seeing its price-to-sales ratio hover near all-time lows. The strength in TWLO and similar "growthy" names of late, suggests that investors are intent on taking advantage of the recent "fire sale" in these types of stocks.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: QQQE, QQQ, RSP and Twilio
For Immediate Release
Chicago, IL – December 14, 2023 – Today, Zacks Investment Ideas feature highlights Nasdaq 100 Equal Weighted Index (QQQE - Free Report) , Nasdaq 100 ETF (QQQ - Free Report) , S&P 500 Equal Weight ETF (RSP - Free Report) and Twilio (TWLO - Free Report) .
5 Reasons the Pendulum Is Swinging Back to Equal-Weight Baskets
The Story of 2023: Equal Weight vs. Market Cap Weighted Indexes
2023 was a year of extremes. When investors look back on 2023 in the future, those who study the sole price action of the major indices will fail to understand what it was like to trade the market in real-time. That's because, until recently, much of the years biggest winners are mega-cap tech juggernauts that have drastically larger market caps than most stocks – and even most countries.
"The Magnificent 7," comprised of high-tech companies, with massive cash hoards, and ample institutional investments have been so strong that they have put the broader indices on their shoulders. In other words, investors who look at market cap-weighted indexes are not getting the full picture because these mega cap behemoths have pulled more than their weight and have masked the weakness (or lack of strength) in other areas of the market.
In an equal-weight index or ETF, every stock in the portfolio carries the same weight, offering more balanced exposure across all holdings. This means smaller companies contribute as much as larger ones. Conversely, market cap-weighted ETFs assigns weights based on the market value of each stock, making larger companies more influential.
To illustrate how stark the difference has been between each of these indexes, the Nasdaq 100 Equal Weighted Index is +27.69%, while its market cap-weighted counterpart the Nasdaq 100 ETF is up ~50%! For the S&P 500 Index, the difference is even more stark. The Invesco S&P 500 Equal Weight ETF is +7.65% for the year, while the S&P 500 Index ETF is up more than double that (+21.31%). Though the trend mentioned above has persisted for most of 2023, there are five signs that mega-cap dominance may be nearing its end, including:
Relative Strength Reversal
Observing a change in raw relative strength is often the first sign that a trend change may be around the corner. Tuesday, QQQE rose 2%, more than double that of the QQQ's +0.85% gain.
Rotation: Digestion in Mega-Cap Stocks Leads to Strength in Other Market Areas
As self-proclaimed data-junkie Callie Cox (@calliebost) pointed out in a tweet, "Today (Tuesday) was the first day since July 2022 that the S&P 500 rose even though every Magnificent 7 stock fell." In other words, as mega-cap winners take a breather, money is rotating into small and midcap cap stocks.
Small Caps: Evidence of Reversion to the Mean Potential
Markets are cyclical. When big caps get stretched to far to the upside, eventually small caps take the baton and outperform. The Russell 2000 Index has failed to mint fresh 52-week highs since November 2021. The streak of more than 500 days without a fresh 52-week high is the longest in the indexes 39-year history. If history repeats, the reversion to the mean should be breathtaking.
Net New High-Low Indicator Suggests Participation is Broadening
After struggling to achieve net new highs for months, the Dow Jones Industrial Average has achieved net new highs for 19 straight sessions. In other words, investors are spreading the love to stocks not within the Magnificent 7.
Valuations Have Shrunk
Valuations in beaten-down growth stocks are becoming too attractive for investors to pass up. Software company Twilio, a former pandemic darling, is seeing its price-to-sales ratio hover near all-time lows. The strength in TWLO and similar "growthy" names of late, suggests that investors are intent on taking advantage of the recent "fire sale" in these types of stocks.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.